Case 3:08-cv-02050-D Document 50 Filed 12/04/2009 Page 1 of 11

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION

SECURITIES AND EXCHANGE §

COMMISSION, §
§
Plaintiff, §
§ Civil Action No. 3:08-CV-2050-D
VS. §
§
MARK CUBAN, §
§
Defendant. §

MEMORANDUM OPINION
AND ORDER

Following the court’s decision granting defendant Mark Cuban’s

(“Cuban’s”) motion to dismiss,1 he moves for an award of attorney’s

fees and costs under 28 U.S.C. § 2412(b) and the court’s inherent

power. Without suggesting a view on the merits of Cuban’s motion,

the court concludes that Cuban should be permitted to conduct some

discovery, followed by supplemental briefing. Accordingly, by this

memorandum opinion and order, the court establishes a discovery

period and a supplemental briefing schedule.

Cuban moves for an award of attorney’s fees and costs,

contending that plaintiff Securities and Exchange Commission

(“SEC”) lacked a good faith basis for this lawsuit. Although the

SEC does not question the court’s authority to award relief under

§ 2412(b) or its inherent power, the SEC maintains that its claims

1
SEC v. Cuban, 634 F.Supp.2d 713 (N.D. Tex.) (Fitzwater,
C.J.), appeal docketed, No. 09-10996 (5th Cir. Oct. 13, 2009).
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against Cuban were factually sufficient, that Cuban’s allegations

of investigative misconduct are unfounded, and that Cuban cannot

meet the high standard required to recover the relief he seeks.

Cuban maintains that the facts on which the SEC relied to

bring this lawsuit were insufficient to support the assertion that

he entered into an agreement to keep information confidential. He

posits that, because the SEC was aware of this defect before it

filed suit, it could not have had a good faith basis for its

insider trading claim.

Cuban also contends that the SEC engaged in misconduct during

its pre-suit investigation. He contends that the “Wells process”2

was improperly initiated before the SEC had substantially completed

its own investigation; he complains about the SEC’s handling of his

attorneys’ Wells submissions; and he argues that, during the SEC

investigation, Guy Fauré (“Fauré”), CEO of Mamma.com Inc.

(“Mamma.com”), was deposed twice, the second time the same week the

SEC closed an investigation of Mamma.com and decided to take no

action against the company. Cuban maintains that in the second

deposition, the SEC attempted to solicit different answers through

2
The “Wells process” refers to an established SEC procedure
whereby SEC staff may notify persons under investigation of the
general nature of the investigation and potential violations being
investigated. At that time, the SEC also notifies persons under
investigation that they may submit a voluntary statement to the SEC
before the staff makes a recommendation regarding whether action
should be initiated. See SEC Enforcement Manual of the
Commission’s Division of Enforcement 24-25 (Oct. 6, 2008).

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leading questions.

Finally, Cuban relies on a series of emails——which Cuban

describes as “harassing”——from an SEC attorney to Cuban.

Cuban maintains that the SEC’s entire insider trading

investigation was motivated by a bias against him. He argues that

this bias is demonstrated in a speech in which the SEC Director of

Enforcement lauded the SEC’s pursuit of high profile insider

trading cases.

II

“As a general rule, litigants must pay their own attorney’s

fees.” Stover v. Hattiesburg Pub. Sch. Dist., 549 F.3d 985, 997

(5th Cir. 2008) (citing Alyeska Pipeline Co. v. Wilderness Soc’y,

421 U.S. 240, 247 (1975)). “The ‘American Rule’ is the starting

point for fee awards: Even prevailing litigants are ordinarily not

entitled to attorneys’ fees from the losing party.” Blue Skies

Alliance v. Tex. Comm’n on Envtl. Quality, 265 Fed. Appx. 203, 206

(5th Cir. 2008) (per curiam) (citing Buckhannon Bd. & Care Home,

Inc. v. W. Va. Dep’t of Health & Human Resources, 532 U.S. 598, 602

(2001)). Cuban relies on two grants of authority to recover

attorney’s fees and expenses from the SEC: the court’s inherent

power to award such relief, and 28 U.S.C. § 2412(b), a provision of

the Equal Access to Justice Act (“EAJA”).

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A trial court has the inherent power to award

fees when it finds that a litigant has acted
in bad faith, vexatiously, wantonly, or for
oppressive reasons. But this inherent power
must be exercised with restraint and
discretion. The inherent power is not a broad
reservoir of power, ready at an imperial hand,
but a limited source; an implied power
squeezed from the need to make the court
function.

Hunting Energy Servs. LP v. Inter-Mountain Pipe & Threading Co.,

242 Fed. Appx. 257, 260 (5th Cir. 2007) (internal quotation marks,

brackets, and footnotes omitted) (quoting Chambers v. NASCO, Inc.,

501 U.S. 32, 42 (1991)). In addition to the court’s inherent

power, § 2412(b) provides:

Unless expressly prohibited by statute, a

court may award reasonable fees and expenses
of attorneys . . . to the prevailing party in
any civil action brought by or against the
United States or any agency or any official of
the United States acting in his or her
official capacity in any court having
jurisdiction of such action. The United
States shall be liable for such fees and
expenses to the same extent that any other
party would be liable under the common law or
under the terms of any statute which
specifically provides for such an award.

“Section 2412(b) incorporates the ‘American rule’ for fee-shifting,

which permits a fee award only when the losing party acted ‘in bad

faith, vexatiously, wantonly, or for oppressive reasons.’” United

States v. Medica Rents Co., 2008 WL 3876307, at *4 (5th Cir. Aug.

19, 2008) (per curiam) (unpublished opinion) (quoting Perales v.

Casillas, 950 F.2d 1066, 1071 (5th Cir. 1992)). In sum, whether

the court addresses Cuban’s fee request under its inherent power,

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or § 2412(b), or both, Cuban must show that the SEC acted in bad

faith, vexatiously, wantonly, or for oppressive reasons. This

showing may be based on the SEC’s decision to file and maintain the

lawsuit against him or on a sufficient demonstration of an abuse of

the judicial process in the method of prosecution. See Batson v.

Neal Spelce Assocs., Inc., 805 F.2d 546, 550 (5th Cir. 1986).

In his reply brief, Cuban requests leave to conduct discovery

“[i]f . . . the Court believes that it also needs to consider the

SEC’s investigative misconduct before rendering a decision.” D.

Reply Br. 10. He contends there are “numerous unresolved factual

issues.” Id. Courts have allowed parties seeking relief under

§ 2412(b) to obtain discovery, including from government officials.

See Energy Capital Corp. v. United States, 60 Fed. Cl. 315, 318-19

(Fed. Cl. 2004) (allowing Plaintiff who sought award of attorney’s

fees under EAJA after prevailing on breach of contract claim

against Department of Housing and Urban Development (“HUD”) to take

depositions of former Secretary of HUD, and HUD’s former General

Counsel, where former officials had first-hand personal knowledge

that no one else had relevant to whether government acted in bad

faith in course of litigation). The court is unaware of any reason

to deny a party reasonable discovery when seeking attorney’s fees

under the court’s inherent power.

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III

Because there are fact issues that remain to be resolved, and

because these issues require (or would benefit from) some

discovery, the court grants Cuban’s request for discovery.3

The SEC’s complaint rested on the argument that Cuban agreed

to keep confidential the information he received from Fauré

regarding the Mamma.com planned private investment in public equity

(“PIPE”) offering. Fauré testified during the SEC investigation

that, in response to stating that the information regarding the

PIPE was confidential, he received from Cuban “some type of

acknowledgment,” such as “‘um-hmm,’ ‘yes,’ ‘go ahead.’” P. Br. 6.

Cuban argues that Fauré’s testimony did not provide the SEC a

sufficient factual basis to support the allegations of the

complaint. Cuban maintains that Fauré’s testimony makes clear that

Cuban at most acknowledged Fauré’s statement that the information

was confidential, but that the testimony could not support the

allegation that Cuban entered into a confidentiality agreement.

Cuban may conduct discovery to support his allegations about the

extent of the evidentiary support for the SEC’s allegation that

Cuban agreed to keep the information confidential.

3
The court assumes that only Cuban seeks discovery. If the
SEC desires to conduct some discovery as well, it may do so in
accordance with this memorandum opinion and order.

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Cuban also asserts that the SEC’s method of conducting the

investigation demonstrates its bad faith. In assessing subjective

bad faith, a court may sanction parties for conducting litigation

with an improper motive even if the complaint was legally adequate.

See Chambers, 501 U.S. at 53 (“[T]he imposition of sanctions under

the bad-faith exception depends not on which party wins the

lawsuit, but on how the parties conduct themselves during the

litigation.”). Cuban should be allowed to obtain discovery that

would enable the court to fairly judge some of his allegations

regarding how the SEC conducted its investigation.

For example, Cuban points to a series of emails sent to him

by a senior SEC enforcement attorney. According to Cuban, these

emails “questioned Mr. Cuban’s patriotism” because of “rumors that

one of Mr. Cuban’s companies was considering distributing a movie

about the 9/11 terrorist attack.” D. Br. 5-6. Some of these

emails were copied to SEC Chairman Christopher Cox (“Chairman

Cox”).4 The SEC responds that the attorney neither played a role

in investigating Cuban nor had any relationship with any employee

who participated in the investigation. Additional discovery will

enable the court to resolve whether the attorney played a role in

investigating Cuban.

4
According to Cuban, Chairman Cox recused himself from the
vote that determined that the SEC would bring an enforcement action
against Cuban.

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Cuban also contends that the SEC took Fauré’s testimony a

second time with the intention of trying to elicit more useful

answers. He points to what he maintains are leading and repetitive

questions, particularly relating to the creation of the alleged

confidentiality agreement. Fauré testified for the second time

only two days after the SEC concluded its investigation of

Mamma.com, which Cuban argues suggests a quid pro quo. Further

discovery should assist in evaluating the SEC’s assertion that the

Mamma.com investigation was “temporally and substantively distinct”

from the investigation of Cuban. P. Br. 21. Discovery could

confirm that there was no overlap of staff working on the two

investigations and/or no quid pro quo.

IV

In allowing discovery, the court reminds the parties that

“[t]he inner workings of administrative decision making processes

are almost never subject to discovery.” Goetz v. Crosson, 41 F.3d

800, 805 (2d Cir. 1994) (addressing disallowance of questions

relating to processes of judicial decision) (citing, inter alia,

United States v. Morgan, 313 U.S. 409, 422 (1941)). “Relying on

Morgan, other courts have concluded that top executive department

officials should not, absent extraordinary circumstances, be called

to testify or deposed regarding their reasons for taking official

action.” Bogan v. City of Boston, 489 F.3d 417, 423 (1st Cir.

2007).

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It is a settled rule in this circuit that

exceptional circumstances must exist before
the involuntary depositions of high agency
officials are permitted. Top executive
department officials should not, absent
extraordinary circumstances, be called to
testify regarding their reasons for taking
official actions.

In re FDIC, 58 F.3d 1055, 1060 (5th Cir. 1995) (internal quotation

marks, brackets, and footnotes omitted); see also Morgan, 313 U.S.

at 422. “‘[H]igh ranking government officials have greater duties

and time constraints than other witnesses’ and . . . without

appropriate limitations, such officials will spend an inordinate

amount of time tending to pending litigation.” Bogan, 489 F.3d at

423 (quoting In re United States (Kessler), 985 F.2d 510, 512 (11th

Cir. 1993) (per curiam)). Furthermore, assuming the information in

question is discoverable, “[i]f other persons can provide the

information sought, discovery will not be permitted against such an

official.” In re United States, 197 F.3d 310, 314 (8th Cir. 1999)

(citing In re United States (Kessler), 985 F.2d at 513); see In re

FDIC, 58 F.3d at 1062 (“We think it will be the rarest of cases .

. . in which exceptional circumstances can be shown where the

testimony is available from an alternate witness.”).

The court also emphasizes that today’s decision to allow

discovery should not be seen as sanctioning a “fishing expedition.”

The grounds on which Cuban relies in his motion5 should be seen as

5
The court does not suggest that any specific ground on which
Cuban relies will probably support relief. It has considered the

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the presumptive limits on the scope of discovery, not as the

starting points. Absent cause, the discovery conducted should be

calculated to establish the merits, if any, of the grounds

asserted, not to find or develop new ones.

The discovery permitted by this memorandum opinion and order

must be completed no later than February 1, 2010.6 No later than

21 days after the discovery period is completed, Cuban may file a

supplemental brief and evidence appendix7 in support of his motion.

No later than 21 days after Cuban files these materials, the SEC

may file a supplemental brief and, if applicable, evidence

appendix.8 No later than 14 days after the SEC files its response,

Cuban may file a supplemental reply brief. The court will decide

the motion under the procedure allowed by Fed. R. Civ. P. 43(c).

It will convene an evidentiary hearing only if necessary to resolve

a controlling fact issue that involves a determination of witness

merits of his arguments only to the extent necessary to decide

whether to allow discovery.
6
The court has set this deadline so that these post-judgment
proceedings are not unnecessarily prolonged. But because it
recognizes that the holidays fall within this period, it advises
the parties that they may request reasonable extensions of this
deadline.
7
To avoid confusion, the pagination of the appendix should
begin with a number that succeeds the last page of the appendix
that Cuban filed on August 28, 2009.
8
See supra note 7 regarding paginating the appendix.

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credibility.9

SO ORDERED.

December 4, 2009.

_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE

9
Cuban has requested oral argument. If the court decides the
motion under Rule 43(c), it will also decide whether to convene
oral argument, which is procedurally distinguishable from an
evidentiary hearing.

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